Gas reservation a good first step but power prices need more

by Michael West | Oct 24, 2018 | Energy & Environment

Importing gas we have already exported? The gas “market” has become that preposterous. Finally, the consumer watchdog has called for gas supply to be earmarked for local markets. Gas analyst, Bruce Robertson, welcomes the move but says more needs to be done to attack high electricity prices.

It is a good thing the Australian government has decided to set a floor price for retail electricity in an effort to bring down energy bills.

In the absence of a true market for electricity – a market with proper competition and pricing mechanisms – and without a regulated price, we were never going to get lower bills.

This is only a partial solution though. They’ve targeted the wrong mechanism, again.

The big issue, as it always has been, is the cost of the network; the price of poles and wires. This is where the most savings can be made. In most states, the governments have sold their networks to private operators and now they need to write them off.

Gas: importing exports will lead to more profiteering

By writing down the value of these assets, customer charges will fall; and that’s because of the way energy companies make their profits – the higher the value of their assets, the more money they can charge their customers.

It seems a perverse thing but it is critical that customers understand this paradox; the more the energy companies spend
on their poles and wires, the more they can charge. Their returns, approved by the regulators, are based on the size of their asset bases.

The other big issue is generation, and the role of gas is important here.

Our high electricity prices are caused by high gas prices, as well as network charges.

Gas sets the price because it’s the highest cost producer in the electricity market. As the ACCC has noted, when gas prices increase by $A1/GJ, wholesale electricity prices increase by$A11/Mwh.

Bruce Robertson

Our high gas prices are the result of high oil prices, and price setting by a cartel of producers on the east coast of Australia – Shell, Origin, BHP and Exxon – who sold out our domestic supply a few years back when they locked in 15-year export contracts tying the price of our gas to oil.

That was in 2012, when the price of oil was over $US100 a barrel. Then oil prices fell below $US50 a barrel, and suddenly these gas companies were in a lot of trouble.

With government backing, they had rushed to build a number of LNG plants to meet export demand – too many in fact – while promising billions of dollars in royalties. But the coal seam gas plants they built in Queensland largely failed to deliver either cheap gas or royalties. In fact, Origin’s Ironbark field totally failed, incurring a write off of $370 million.

All they had seen were the dollar signs, not the risk.

It was an unmitigated disaster in terms of cost – both the cost of the LNG plants and the cost of the gas coming out of the fields.

Nine Lies: how the gas cartel clouted Australia with price rises

The usual way to develop gas markets is by drilling out fields and supplying domestic markets first. Export comes next.

Our east coast cartel of gas producers had locked in 15-year export contracts before ensuring supply.

They diverted our cheaper traditional sources of gas for export and used the failing LNG export plants to collectively reprice domestic gas to above international parity prices.

Our east coast market became one-third domestic and two-thirds exports.

While production of gas tripled, the price of domestic gas also tripled.

Most countries have a domestic gas reservation policy at a price, and usually that price is well below international parity.

Or they have a national interest test. Something like, before you open a facility, you must swear it won’t affect domestic prices.

Gas prices in the United States are under half what they are here. In Qatar they are around one third of what they are here. Those two countries are our major exporter competitors. And they are the two we should compare our prices too.

Even Western Australia has a domestic gas reservation policy. They pay $5 for gas.

But the east coast of Australia remains an energy-policy-free zone, and we, the customers, keep picking up the tab. Locals pay $10 for contract gas. And it’s set to increase to a whopping $15, a 50 per cent increase in the short term.

Gas and royalty arrangements over gas have had a stagnant political effect in Australia, but it’s time for policy-makers to move on.

Our very own east coast gas oligopoly needs an urgent shake-up.

When they opened new LNG plants their approval documents clearly stated they would not affect our domestic market.

They have.

There is no “free” market on the East Coast, and gas prices have gone through the roof. The situation has become so preposterous that Australia, a nation swimming in gas reserves, is now busy building gas import terminals to import gas it has already exported. This, thanks to the gas cartel and poor government decisions.

The government needs to expand the ACCC’s recommendation of (finally) developing a gas reservation policy on any new fields on the east coast, by applying it to existing fields where the gas is.

It will make the cartel unhappy, but they have sorely let us down.

It would enforce the original terms of their contracts where they pledged they would not hurt the Australian domestic market.

We need our lower prices back and a full and reservation policy on all gas fields.

This would reduce gas prices.

It would also reduce electricity prices in Australia, lower the cost for all businesses and, even more vitally, lower the cost for households struggling to pay their quarterly power bills.


The following three-part podcast investigation into the reasons behind the rise in power prices and what can be done to solve the crisis features interviews with Bruce Robertson, Jeff Kennett, Rod Sims, Bruce Mountain, Tristan Edis, Roman Domanski and John Thwaites.

The definitive investigation into Australia’s energy crisis

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

Don't pay so you can read it.

Pay so everyone can.

Pin It on Pinterest

Share This